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Civil society calls for inclusion of biodiversity in financial return

© Shutterstock / Manuel EstebanPost Thumbnail

The World Wildlife Fund (WWF) is leading a call to action, demanding biodiversity’s inclusion in the primary mandates of central banks and financial supervisors.

  • As global decision makers prepare to convene for COP15, central banks and financial supervisors have been called to include biodiversity risks within their primary mandates.
  • Natural ecosystems are an essential source of life-support, but are reaching their breaking point, having seen catastrophic over the last few decades.
  • The ongoing development of more robust and systemic financial frameworks should provide central banks with a clearer path to making the necessary changes.

The WWF is joined by 90 civil society partners in calling for the identification and mitigation of biodiversity and climate risk to be included within the primary mandates of central banks and financial supervisors.

The request comes in advance of the second phase of the fifteenth meeting of the Conference of the Parties to the Convention on Biological Diversity (COP15),  following previous work on how central banks assess biodiversity risks and produce tools and strategies for their mitigation.

This is important not only for COP15, which is taking place in two phases in China and Canada in October 2022, but also COP27 which is taking place in Egypt in November 2022. Egypt has already said that it will put climate finance at the heart of the negotiations and the integration of the importance of externalities (such as the negative impacts of biodiversity destruction) needs to be addressed at the international level.

Given that it was the world of the climate negotiations and NGOs that led to the integration of climate risk into central banking mandates, it can only be hoped that this work will follow the same path.

What does the call to action request?

The WWF-led network of non-governmental organisations is specifically calling for central banks to commit to becoming nature positive and implementing strategies for achieving full biodiversity recovery by 2050.

It also includes demands based on greenhouse gas emissions, requesting they be halved from their 2019 baseline, and pushes for operations to be organised around maintaining global temperature increases below the critical IPCC target of 1.5 degrees.

Short term targets should be put in place, with the same reporting requirements as are expected elsewhere.

The movement adds that central banks should request all regulated financial institutions to provide detailed transition plans on a yearly basis, covering each of their investment, lending and underwriting practices.

Ultimately, the call to action reflects the increasing urgency of preserving and restoring our natural ecosystems.

The WWF works to bring this crisis to light by holding influential organisations to account for the findings of its research.

In the 2020 issue of its annual Living Planet report, for example, the WWF reveals that the populations of mammals, birds, fish amphibians and reptiles have fallen by an average of 68% worldwide in 50 years.

What can central banks actually do?

Central banks lead the banking system and economy with their setting of interest rates.

If they make commitments in line with the call to action, they could similarly lead the way in mandating climate and biodiversity goals for 2025, 2030 and 2050, covering all central banking, financial regulation and supervision.

More stringent conditions or disincentives could be put on companies or economic activities that are considered as ‘always environmentally harmful’ in terms of lending and underwriting, such as higher regulatory capital requirements and tighter liquidity requirements.

As well as steering finance away from environmentally harmful activities, central banks could introduce a “green dual rate” – a discount interest rate on future refinancing encouraging clean energy production and energy efficiency renovations.

Willingness among central banks to ‘green’ the financial system – this road map makes it more robust

Despite the demanding implications of a call to action, these measures are not being thrust upon central banks. 

In fact, they have already demonstrated a willingness to engage in collaborative steps to address climate-related financial risks.

The Network for the Greening of the Financial System (NGFS)  was established in December 2017 at the Paris One Planet Summit. It comprises 95 central banks, financial supervisors and 15 observers, which voluntarily share examples of best practice.

This network aims to contribute to the development of environment and climate risk management within the financial sector, and to mobilise mainstream finance in support of the transition towards a more sustainable global economy.

Together, its members represent five continents and around 85% of global greenhouse gas emissions.

They hold responsibility for the supervision of all  global systemically important banks and two thirds of global systemically important insurers, highlighting their significant level of influence.

The call for action comes ahead of the second meeting of the COP 15 Biodiversity conference in November 2022. It will be followed by the delivery of the Global Biodiversity Framework in December.

Prior to the convention’s first meeting, the NGFS issued its Biodiversity and Financial Stability: Building the Case for Action report in collaboration with the INSPIRE research network.

The 2021 report, which targeted central banks, made a series of recommendations including the development of biodiversity-related scenarios, as well as new tools to address biodiversity-related risks.

It explored the potential economic and financial impacts of biodiversity loss, as grounded in the latest scientific evidence at the time, discussed the challenges of assessing them and considered what next steps might be available.

A drafted version of the upcoming framework , which will be refined during COP15, indicates that it will go even further, stipulating strict targets and quantifiable actions towards meeting them.

Acknowledgement of double materiality

These issues are centred around the assessment of double materiality, which incorporates both the impacts of biodiversity loss on financial actors and the reverse influence of financial actors on biodiversity.

Double materiality expands the conventional understanding of what accounting standards consider ‘material’ to include not only climate-related impacts on the company, but also the impact of the company on the climate.

Following this framework means that the disclosure of environmental impact is required, as it is considered ‘material’ to the company’s success or failure.

In this case, the global economy and its financial systems are deeply intertwined with natural ecosystems, which are being subjected to destruction at an unprecedented rate.

Nick Robins, co-author of the original NGFS report, explained how the research it contains, “shows the severity of the macroeconomic consequences of biodiversity loss and profiles the increasing efforts by central banks and supervisors to understand the implications for both financial institutions and for the system as a whole.”

The sustainability of global economic systems depends on these interconnections with nature. As noted by Dr Akinwumi Adesina, president of the African Development Bank Group,  “Nobody eats and breathes GDP”.

Tracks made in private sector

Some companies and financiers within the private sector are already taking up the challenge of transitioning their businesses to reduce harm to the environment.

They have relied on frameworks such as the  Taskforce on Nature-related Financial Disclosures (TNFD) and the Finance for Biodiversity Pledge. Following a similar trajectory, close to 300 banks that have signed onto the UNEP FI’s Principles for Responsible Banking initiative are now setting biodiversity targets that complement their climate targets. 

Ecosystem accounting to enter government decision making

Governments are also taking steps to develop more robust frameworks to incorporate biodiversity risks in economic systems.

In August 2022, the US White House launched a multi disciplinary strategy to incorporate natural capital into official statistical accounting, linking ecosystem information to economic activity and decision making.

The UK’s Dasgupta Review on the Economics of Biodiversity was published a year previously in 2021.

Commenting on this review, UN special envoy for climate action and finance Mark Carney said that, “as we awaken to the importance of natural capital, we need to place greater value on sustainability and biodiversity – the precondition to solving the twin crises of biodiversity and climate.”

Evidently, there are actions that central banks, financial regulators and supervisors, should take to incorporate biodiversity risks within their commitments.

The development of more robust and actionable frameworks, following the approach of private sector organisations and global governments, could pave the way to enabling such commitments to be made.

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